‘Mansion House reforms’ seek to channel pension savings into unlisted firms

City executives gathered in London’s Square Mile on Monday evening to hear chancellor Jeremy Hunt announce his latest reforms aimed at tapping the UK’s financial services sector to reinvigorate the economy. 

Hunt will use his “Mansion House reforms” to attempt to boost the UK economy by channelling pensions savings towards potentially higher growth, illiquid assets and pushing smaller funds to consolidate in the hope this will make them more efficient. 

The chancellor is also pressing ahead with changes, most of which were already in train before Monday, in an effort to make the UK a more attractive place for companies to list. 

Channelling defined contribution pensions into private companies 

The flagship element of Hunt’s initiative is a “compact” signed by nine of the UK’s largest pension providers to commit 5 per cent of their so-called default funds for defined contribution pension savers to unlisted equities by 2030. 

Defined contribution pension funds, where retirement payments are based on investment returns, invest only 0.5 per cent of their estimated £500bn of assets in unlisted UK companies — limiting the pool of funds available to private companies, including start-ups. 

The government believes this deal, which covers funds where investors do not specify where they want their money invested, could unlock up to £50bn of investment in high growth companies by 2030 if all such UK pension schemes follow suit. However, there would be no requirement for the money to be invested in UK companies. 

Peter Harrison, chief executive of FTSE 100 asset manager Schroders, welcomed the reforms overall, saying: “We need to get to a position where we ensure that people save for the long term and take adequate risk, rather than the consumer protection culture.”

Hendrik du Toit, chief executive of asset manager Ninety One, said the package represented “quite a brave effort” but added that the government had failed to encourage “the billionaires of this world to be here and to back people here”.

“We have spent a decade pushing out those people who have more risk appetite and it will be hard to build the ecosystem without them,” he said.

The number of companies listed on the London stock exchange has plummeted as part of a long-term trend of “de-equitisation” while valuations lag those in the US, where Apple’s market value has eclipsed the entire FTSE 100. 

Overhauling local government schemes

The chancellor wants to redirect the pools of cash held in dozens of local government pension schemes to boost the economy. He will set town hall pension schemes an ambition to double existing investments in private equity to 10 per cent, which the government believes could amount to £25bn by 2030.

Hunt will also set a March 2025 deadline for dozens of local authority pension funds to pool their assets so they can benefit from economies of scale. 

Local government pension schemes are funded through contributions from local authority workers and employers, with pension savers and taxpayers sharing the risk if investment returns are not as expected.

“The chancellor believes scale and active management bring better returns,” said Quentin Marshall, chair of the £1.6bn Royal Borough of Kensington and Chelsea pension fund, the UK’s best funded local authority plan. “We haven’t seen the evidence to support this belief but share his objective to improve pension outcomes.”

Expanded role for pensions lifeboat

The government is to consider proposals to pool defined benefit, or final salary, pension funds to harness the benefits of scale. There are more than 5,000 defined benefit, or final salary, style plans in the UK, which are sponsored by companies. The majority of DB pension plans, with combined assets of more than £1.4tn, are invested in government bonds rather than shares.

The government believes the investment potential of these funds could be unleashed by expanding the role of the Pension Protection Fund, which currently only takes on a company’s scheme when the employer fails. A call for evidence is seeking views on whether the fund should take on schemes that have not failed, with the expanded fund investing in areas that stimulate the economy. 

PPF chief executive Oliver Morley welcomed the government’s proposals for the fund but the Association of Consulting Actuaries said expanding the its role “would be fraught with practical, moral hazard and systemic risk considerations”.

As part of its package, the government will also push ahead with its planned “super funds” regime, where private sector consolidators take on underfunded schemes with the aim of eradicating the shortfall.

Rolling back EU Mifid II rules 

Hunt backed new recommendations aimed at boosting the amount of investment research on UK listed companies, particularly small and mid-cap groups. 

The changes proposed by City lawyer Rachel Kent would partly roll back the EU’s Mifid II rules, which barred stockbrokers from providing research for free by “bundling” it with share trading services for which clients pay a commission. 

Given that the EU is scaling back the Mifid II restrictions, Hunt did not have much choice but to loosen the rules or the UK would be less competitive, said one market participant. 

Jonathan Herbst, partner at law firm Norton Rose Fulbright, said the challenge would be to make changes without “losing sight of the conflicts concerns which led to them in the first place”. 

Kent also proposed the creation of a platform to commission company research for use by investors but did not answer the thorny question of who should fund it. 

Instead, she listed several options, including asking the taxpayer to stump up “seed capital” for the venture or bankrolling it with a levy on either listed companies or the financial sector. The London Stock Exchange could also be asked to help fund the initiative. 

She also recommended making it easier for retail investors to access investment research.

Hunt will also press on with a wider overhaul of capital markets rules, including plans to simplify the prospectus documents that listed companies must publish when raising money.

Additional reporting by Harriet Agnew and Emma Dunkley

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